The Cyprus tax reform of 2002 is the most substantial tax reform ever made since the Republic of Cyprus was established in 1960.
The new tax regime that comes into force on the 1 January 2003 brings about fundamental changes to the current tax system.
The major fundamental changes in the tax legislation of Cyprus are:
There will be no differentiation between local and International Business Companies.
The taxation of companies will be based on tax residency.
Under the new legislation companies will be considered resident in Cyprus and taxed in Cyprus if they are managed and controlled in Cyprus.
Participation exemption for dividends received from other companies.
No withholding tax on dividends, interest and royalties payable to non-residents (foreign companies and individuals).
All companies will be taxed at the rate of 10% but there are transitional provisions for IBCs which at 31 December 2001 were generating income from sources outside Cyprus. These companies may elect to be taxed at 4,25% up to the end of the year 2005. Companies which elect to continue with this preferential rate till 31 December 2005 may not take advantage of the various exemptions and favourable provisions introduced by the new regime.
The term “resident” has been added to the vocabulary of relevant terms under the new taxation system. For corporate entities, as mentioned above, the criteria are management and control. As far as physical persons are concerned, an individual who stays in Cyprus for a period or periods exceeding in aggregate 183 days in the year of assessment is considered resident in Cyprus.
Tax liability will be based either on residence (worldwide income for residents) or on Cyprus source income only for non-residents. Incorporation of the Company per se is no longer a criterion establishing residence in Cyprus.
A tax liability of 5% is introduced for the years 2003 and 2004 for companies or semi-governmental organisations whose annual gains exceed CYP 1 000 000. The implications of this liability may be minimised if we consider that companies which have the choice and elect to pay the preferential rate of 4.25% till 31 December 2005 will not be liable to this tax, nor will a certain group of companies subject to the new legislation (e.g. dealers in securities or holding companies receiving dividends).
PERSONAL INCOME TAX
An individual is considered to be resident in Cyprus if he spends 183 days or more in Cyprus.
Residents will be taxed on income from: